Don, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year. The Tax Court has held that $200,000 represents unreasonable compensation. Don must report a salary of $400,000 and a dividend of $200,000 on his individual tax return.

Question

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The Tax Court has found $200,000 of the $600,000 salary as unreasonable compensation, so Don must report a salary of $400,000 and a dividend of $200,000 on his individual tax return. This is because unreasonable compensation is not deductible as a business expense for the corporation, but it is still taxable income for the individual who received it.

Don, the Sole Shareholder of Pastel Corporation (A C Corporation)